8. By-Laws

CORPORATION LAW REVIEWER (2013-‐2014)

ATTY. JOSE MARIA G. HOFILEÑA

BY-‐LAWS

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I. Nature and Functions: •

The power to adopt by-‐laws is an inherent power on the part of

By-‐laws are intramural in nature and not meant to bind parties outside the corporate family. o

One point of view is that since by-‐laws operate merely as internal rules among the stockholders and corporate officers, they cannot affect nor prejudice third persons who deal in good faith with the corporation, unless they have knowledge of the same; and that strangers are not bound to know the by-‐laws of a corporation which are merely provisions for the government of a corporation and notice of them will not be presumed.

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Under such theory, since by-‐law provisions are intramural in nature and are not meant to bind parties outside the corporate family, it stands to reason that the public dealing with the corporation is not supposed to be interested in the provisions of the corporation's by-‐laws, and therefore should not be bound thereby. 1

those forming a corporation or any other form of association. Gokongwei v. SEC, 89 SCRA 337 (1979). •

As the “rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it,” by-‐laws are indispensable to corporations. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997). o By-‐laws have traditionally been defined as regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal governance, including rules for routine matters such as calling meetings and the like. If those key by-‐law provisions on matters such as quorum requirements, meetings, or on the internal governance of the local/chapter are themselves already provided for in the constitution, then it would be feasible to overlook the requirements for by-‐laws. Indeed in such an event, to insist on the submission of a separate document denominated as “By-‐Laws” would be an undue technicality, as well as a redundancy. San Miguel Corp. v. Mandaue Packing Products Plants Union-‐ FFW, 467 SCRA 107 (2005).

A. Common Law Limitations on By-‐Laws (Requisites of Valid By-‐Laws) 1. By-‐Laws Cannot Be Contrary to Law and Charter •

By-‐laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions; they are always subject to the charter of the corporation. Rural Bank of Salinas, Inc. v. Court of Appeals, 210 SCRA 510 (1992).

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Although the power of the corporation to adopt by-‐laws is an inherent right, and it exist even without the law expressly granting such power, nevertheless, Section 36 of the Corporation Code expressly enumerates as one of the powers of

1

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)



a corporation, the power to adopt by-‐laws "not contrary to law, morals or public policy." Jurisprudence has long before established that by-‐law provisions cannot contravene the law.1 •

amending its by-‐laws and providing that his/her position shall cease to exist upon the occurrence of a specified event.” Salafranca v. Philamlife (Pamplona) Village Homeowners, 300 SCRA 469 (1998). 2. By-‐Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature of By-‐laws.

The corporation being a creature of the law, its by-‐law provisions cannot prevail over legal provisions and the lawful court orders and processes.2 Examples:

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A by-‐law provision that empowers the Board of Directors to cancel the shares of any member and return to the owner thereof the value thereof was declared void for being in violation of the provision in the Corporation Law that provided that capital can only be returned after dissolution. Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927)

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articles of incorporation to the contrary would supersede the similar provision in the by-‐laws of a corporation. In other words, any provision in the by-‐laws which contravenes the provision in the articles of incorporation must give way to the article provision, even when the nature of the subject matter is something that would normally find it provided in the by-‐laws rather than in the articles of incorporation.3

A by-‐law provision granting to a stockholder permanent seat in the Board of Directors is contrary to the provision in Corporation Code requiring all members of the Board to be elected by the stockholders. Even when the members of the association may have formally adopted the provision, their

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Authority granted to a corporation to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the

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The by-‐laws provisions cannot be such or be amended to be

adoption of regulations as to the formalities and procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998). 3. By-‐Law Provisions Cannot Discriminate.

Government of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927). Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2

Example:

action would be of no avail because no provision of the by-‐laws can be adopted if it is contrary to law. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997). able to go around the security of tenure clause of employees nor impair the obligation of existing contracts or rights… otherwise, it would enable an employer to remove any employee from his employment by the simple expediency of 1

Under Section 47 of the Corporation Code, even specified provisions of the by-‐laws are "subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation." That would mean that any provision in the

B. Binding Effects on By-‐laws on the Dealing Public:

3

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.




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The rule is that by-‐law provisions must be “reasonable and calculated to carry into effect the objects of the corporation” comes from the theory that by-‐laws, as a basic contract document, has the sole purpose of regulating the relationship between and among the parties within the intra-‐corporate relationship. Consequently, any by-‐law provision that does not fulfill such objective is deemed to be unreasonable and void. o General Rule: The validity or reasonableness of a by-‐law provision is a question of law. o Exception: This rule is subject to the limitation that "where the reasonableness of a by-‐law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-‐laws and who have exercised their authority."1 Example:

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By-‐law provisions on the required quorum for special meetings of the Board have the force of law and are binding even on third-‐parties who deal with the properties of the corporation. Peña v. Court of Appeals, 193 SCRA 717 (1991). Peña v. Court of Appeals

Facts: Pampanga Bus Co. (PAMBUSCO) owned several mortgaged lots. The lots were foreclosed and were sold to Rosita Peña, as highest

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Ibid, at pp. 361-‐362, citing People ex rel. Wildi v. Ittner, 165 Ill. App. 360, 367 (1911).

bidder. PAMBUSCO through 3 of 5 directors (the only ones present at that meeting) resolved to authorize Briones (one of the directors) to execute a deed of assignment of their right of redemption in favor of Marcelino Enriquez, who thereafter sold the same to Spouses Yap. Peña contends that there could be no valid sale to the spouses Yap because the deed of assignment in favor of Enriquez was void for being executed ultra vires and against the by-‐laws of the corporation which provided that a quorum requires that at least 4 directors be present at the meeting, otherwise the meeting may be invalidated by failure or irregularity of notice. Issue: Whether or not the act of the board was against the corporation’s by-‐laws, and consequently, void. Held: YES. Section 4 of PAMBUSCO’s by-‐laws provided that at least four directors should be present to constitute a quorum. According to the Corporation Code any action resolved by the board with less than the number provided in the by-‐laws of the corporation to constitute a quorum would not bind the corporation. When a quorum is not reached, all the present directors could do is to adjourn. Moreover, the purported directors who attended the meeting and voted in favor of the assignment were bogus directors as they were not listed in the SEC as directors, nor were they stockholders of the company. Doctrine: The by-‐laws of a corporation are its own private laws which substantially have the same effect as the laws of the corporation. In this sense they become part of the fundamental law of the corporation with which the corporation and its directors and officers must comply.




WHAT IF: Atty. Hofileña à if the other two directors showed up and agreed to what the three others had initially made, would judgment have been different? NO. •

Non-‐Binding Effects of By-‐Laws to “Outsiders.” The nature of by-‐laws being intramural instruments would mean that they are not binding on third-‐ parties, except those who have actual knowledge of their contents. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997). China Banking Corp. v. Court of Appeals

Facts: Galicano Calapatia, Jr. is a stockholder of private respondent Valley Golf & Country Club, Inc. (VGCCI). He pledged his Stock Certificate to petitioner China Banking Corp. (CBC) to secure a debt. This was recorded in the corporate books with VGCCI’s consent. Calapatia failed to pay his obligations, so CBC filed a petition for extrajudicial foreclosure and informed VGCCI asking that the pledged stock be transferred to CBC’s name. However, VGCCI also informed CBC that it will not be able to do so because Calapatia has unsettled accounts with the club. Subsequently, because of Calapatia’s unsettled accounts with the club, VGCCI sold the stocks in a public auction in accordance with Section 3, Article VIII of its By-‐Laws. Three years after, CBC informed VGCCI that it was the new owner by virtue of the auction sale, however, VGCCI replied that for reason of delinquency, the same share of stock was sold at the public auction. So of course, CBC protested and filed a case with the RTC of Makati for the nullification of the auction sale and the issuance of a new stock certificate in its name.

Issue: Whether or not the by-‐laws of VGCCI can affect CBC. Held: NO. VGCCI only began sending notices of delinquency to Calapatia after it was informed by CBC of its foreclosure proceedings. Also, even though VGCCI acknowledged the pledge agreement between Calapatia and CBC, it completely disregarded CBC’s rights as a pledgee by not informing it of the public auction it initiated. VGCCI contended that CBC had actual knowledge of the club’s by-‐laws and therefore must be bound. However, in order to be bound, the third party must have acquired knowledge of the by-‐laws at the time the agreement was entered into between him and the shareholder. In the case at bar, CBC was only informed of the by-‐laws after it informed VGCCI of the public auction. Also, VGCCI could have easily informed petitioner of its by-‐laws when it sent notice formally recognizing CBC as pledge of one of its shares registered in Calapatia’s name. Doctrine: General Rule: Third persons are not bound by the by-‐laws of a corporation since they are not privy thereto. Exception: When third persons have actual knowledge or constructive knowledge of the same. However, this knowledge of the by-‐laws must be present at the time of the perfection of the contract, and not only during the proceedings.


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“Neither can we concede that such contract would be invalid just because the signatory thereon was not the Chairman of the Board which allegedly violated the corporation’s by-‐laws. Since by-‐laws operate merely as internal rules among the



stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same.” PMI Colleges v. NLRC, 277 SCRA 462 (1997). C. Principle of Waiver of Applicable to By-‐Laws •

A by-‐law may be waived by a stockholder or member when it is he whose individual rights are advanced or protected by its provisions. If a corporation acts or contracts in disregard of a by-‐ law with the consent or acquiescence of the stockholders or members, there is a waiver of the by-‐laws, at least pro hac vice, whether it is afterwards sought to set up the by-‐laws against strangers or as against its stockholder or members.1

II. Adoption Procedure (Section 46) Section 46. Adoption of by-‐laws. Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-‐laws for its government not inconsistent with this Code. For the adoption of by-‐laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-‐stock corporations, shall be necessary. The by-‐laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the

stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-‐laws may be adopted and filed prior to incorporation; in such case, such by-‐ laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-‐laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-‐laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-‐laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-‐laws or amendments are in accordance with law. (20a)

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“SEC Opinion No. 22, series of 2003, addressed to Flores Ladia Bacalla Law Firm” as cited in “Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.”


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There can be no automatic dissolution simply because the incorporators failed to file the required by-‐laws under Section 46 of Corporation Code. There is no outright “demise” of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution,



agency or society. In other words, the incorporators must be given the chance to explain their neglect or omission and remedy the same.” Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997). •

A corporation which has failed to file its by-‐laws within the prescribed period does not ipso facto lose its powers as such, and may be considered a de facto corporation whose right to exercise corporate powers may not be inquired into collaterally in any private suit to which such corporations may be a party. [?] Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005). o

There is a matter of compliance with the requirements so there is a corporation, but it is simply defective.

III. Contents (Section 47) A. Matters Usually Found in the By-‐Laws Section 47. Contents of by-‐laws. Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-‐laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and

the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-‐laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a) B. Other Matters that May Be Included in By-‐Laws •

The by-‐laws relate to the internal affairs of the corporation. o

It may contain the duties and responsibilities of the people comprising the corporation.

Other matters which under the Corporation Code may be provided for




in the by-‐laws are as follows: (a) Designation of time when voting rights may be exercised by stockholders of record;1

(i) Providing for interest on unpaid subscriptions;9 (j) Entries to be made in the stock and transfer book;10 and

(b) Providing for additional officers for the corporation;2 (c) Provisions for the compensation of the directors;3 (d) Creation of an executive committee;4 (e) Date of the annual meeting or provisions of special

(k) Providing for meetings of the members in a non-‐stock corporation outside of the principal office of the corporation.11 C. Matters That May Be Found in Articles of Incorporation and By-‐Laws •

incorporation vis-‐à-‐vis the by-‐laws? o Those expressly stated in the Corporation Code must be placed in either document accordingly. o However, with regard to information that is not in the articles of incorporation, then it is left to the discretion

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meetings of the stockholders or members of the corporation; (f) Quorum on meetings of stockholders or members of the corporation;6 (g) Providing for the presiding officer at meetings of the directors or trustees, as well as of the stockholders or members;7 (h) Procedure for issuance of certificates of shares of stock;8

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Section 24, Corporation Code. Section 25. ibid. 3 Section 30. ibid. 4 Section 35. ibid. 5 Sections 50 and 53. ibid. 6 Section 52. ibid. 7 Section 54. ibid. 8 Section 63. ibid. 2

How do you determine what goes into the articles of

of the directors/incorporators where to place the information. Provided, that what is in the articles of incorporation cannot be contained in the by-‐laws(?) In addition, the Corporation Code expressly allows certain matters to be provided for either in the articles of incorporation or the by-‐laws of the corporation, thus: (a) Providing for cumulative voting in non-‐stock corporations;12

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Section 66. ibid. Section 74. ibid. 11 Section 93. ibid. 12 Section 24. ibid. 10




(b) Providing for a higher quorum requirement for a valid board meeting;1 (c) Limiting, broadening or denial of the right to vote, including 2

voting by proxy, for members in non-‐stock corporations; (d) Transferability of membership in a non-‐stock corporations;3 (e) Termination of membership in non-‐stock corporations;4 (f) Manner of election and term of office of trustees and 5

officers in non-‐stock corporations; (g) Manner of distribution of assets in non-‐stock corporations upon dissolution;6 and (h) Providing for staggered board in educational institutions;7 In a close corporation, restrictions on the right to transfer shares must appear both in the articles of incorporation and in the by-‐laws, as well

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Section 25. ibid. 2 Section 89. ibid. 3 Section 90. ibid. 4 Section 91. ibid. 5 Section 92. ibid. 6 Section 94. ibid. 7 Section 108. ibid.

as in the certificate of stock; otherwise, the restriction shall not be binding on any purchaser thereof in good faith.8 D. Matters That Cannot Be Provided for in By-‐Laws On the other hand, under the provisions of the Corporation Code, the following matters must be provided for in the articles of incorporation, and consequently cannot be governed by the corporation's by-‐laws: (a) Classification of shares of stock and preferences granted to preferred shares;9 (b) Provisions on founder's shares;10 (c) Providing for redeemable shares;11 (d) Provisions on the purposes of the corporation;12 (e) Providing for the corporate term of existence;13 (f) Capitalization of stock corporations;14 (g) Corporate name;1 and

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Section 98. ibid. Section 6, Corporation Code. 10 Section 7, ibid. 11 Section 8, ibid. 12 Sections 14, 15, 36(11) and 45, ibid. 13 Sections 11, 14 and 37, ibid. 14 Sections 13 and 14, ibid.. 9




(h) Denial of pre-‐emptive rights;2 IV. Amendments and Revisions of By-‐Laws (Section 48) Section 48. Amendments to by-‐laws. The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-‐stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-‐laws or adopt new by-‐laws. The owners of two-‐thirds (2/3) of the outstanding capital stock or two-‐thirds (2/3) of the members in a non-‐stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-‐laws or adopt new by-‐laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-‐laws or adopt new by-‐laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a

the same to be attached to the original articles of incorporation and original by-‐laws. The amended or new by-‐laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a) SUMMATION à Although the law provides a 1-‐month lee-‐way where a corporation can submit their by-‐laws. •

articles of incorporation. This practice has been around so much that the SEC may sometimes reject your application if the by-‐laws are not attached. à Articles + By-‐Laws = Company’s Constitutive Documents •

majority of the members in non-‐stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-‐laws are adopted, such amendment or new by-‐laws shall be attached to the original by-‐laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission

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Sections 14 and 18, ibid.. Section 39, ibid..

However, in practice, the by-‐laws are submitted with the


Hierarchy: Law à Articles of Incorporation à By-‐Laws

8. By-Laws

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